The Eleventh Circuit’s recent opinion in Wiand v. Lee clarifies longstanding issues relating to an equity receiver’s standing to pursue clawback claims for the benefit of the receivership estate under the Florida Uniform Fraudulent Transfer Act (“FUFTA”). See Wiand v. Lee, 2014 WL 2446084 (11th Cir. Jun. 2, 2014); see also § 726.101 et seq. The decision also marks a change in the application of FUFTA to Ponzi scheme cases by disposing of the requirement of proving the “badges of fraud” for a claim of actual fraud. Wiand v. Lee, 2014 WL 2446084, at *4 (“proof that a transfer was made in furtherance of a Ponzi scheme establishes actual intent to defraud under § 726.105(1)(a) without the need to consider the badges of fraud.”); see also § 726.105(2), Fla. Stat. This decision is a welcomed opinion by receivers who are tasked to protect the assets of a receivership estate and recover funds for the benefit of the schemers’ victims.

At issue in Wiand v. Lee, was Arthur Nadel’s Ponzi scheme. Nadel’s scheme involved the inducement of investors to open trading accounts to invest in hedge funds based on false representations as to the performance of the funds. Rather than provide the services promised, Nadel commingled the investors’ funds with his personal accounts, paid older investors to maintain the appearance of profit generation and to attract new investors into the scheme. The receiver, Wiand, brought a lawsuit against Lee seeking the return of “false profits” on behalf of the receivership entities in order to partially compensate those investors who suffered a net loss on their investments. The Receiver sought to void the distributions from the receivership entities to Lee as fraudulent transfers under FUFTA because every transfer of an asset from a the Ponzi scheme, during the scheme’s operation, was made with actual intent to hinder, delay, or defraud creditors of Nadel. See Fla. Stat. § 726.105(1)(a).

On appeal, the Eleventh Circuit was called upon to determine, in pertinent part: (i) whether FUFTA’s badges of fraud must be shown to prove fraudulent intent for a claim of actual fraud, and (ii) whether a receiver has standing to pursue transfers of the “property of a debtor” under FUFTA.

On the first issue, the Court held that:

We now clarify that, under FUFTA’s actual fraud provision, proof that a transfer was made in furtherance of a Ponzi scheme establishes actual intent to defraud under § 726.105(1)(a) without the need to consider the badges of fraud

Wiand v. Lee, 2014 WL 2446084, at *4.

On the second issue, regarding a receiver’s standing to pursue claims on behalf of the receivership entities that were injured by the Ponzi scheme, following Judge Richard Posner’s often cited decision in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995), the Eleventh Circuit explained:

A receiver of entities used to perpetrate a Ponzi scheme does not have standing to sue on behalf of the defrauded investors but does have standing to sue on behalf of the corporations that were injured by the Ponzi scheme operator. Although the corporations constitute the “robotic tools” used by the Ponzi operator, they are “nevertheless in the eyes of the law separate legal entities with rights and duties.”

The Court’s rationale recognizes that operators of a scheme harm the victims of the scheme as well as the corporation through which the scheme is operated:

The money [the corporations] receive from investors should be used for their stated purpose of investing in securities, and thus the corporations are harmed when assets are transferred for an unauthorized purpose to the detriment of the defrauded investors, who are tort creditors of the corporations. Although the corporations participate in the fraudulent transfers, once the Ponzi schemer is removed and the receiver is appointed, the receivership entities are no more the “evil zombies” of the Ponzi operator but are “[f]reed from his spell” and become entitled to the return of the money diverted for unauthorized purposes.

Although the opinion in Wiand v. Lee specifically involves a Ponzi scheme, the analytical framework may be applicable in other equity receivership cases where the corporate enterprise is operated as a scheme to perpetuate unlawful conduct such as fraud or other statutory violations asserted by the Federal Trade Commission or the Securities and Exchange Commission. In many such cases, a similar fact pattern develops: with each transfer made, the transferor became a debtor of the receivership entities because he diverted the funds from the receivership entities’ lawful purpose. And, with each transfer, the property transferred could have been applicable to the debt due, namely, the very funds being transferred. See Wiand v. Lee, 2014 WL 2446084, at *6. In those similar cases, the receiver has a “claim” to pursue on behalf of the receivership entities.

Applying Lehmann to FUFTA, the receivership entities became “creditors” of Nadel at the time he made the transfers of profits to Lee and others because, as FUFTA requires, they had a “claim” against Nadel. They had a “claim” against Nadel because he harmed the corporations by transferring assets rightfully belonging to the corporations and their investors in breach of his fiduciary duties, and a “claim” under FUFTA includes “any right to payment” including a contingent, legal, or equitable right to payment. Fla. Stat. § 726.102(3); see also Cook v. Pompano Shopper, Inc., 582 So. 2d 37, 40 (Fla. 4th DCA 1991) (“A tort claimant or contingent claimant is as fully protected under the Uniform Fraudulent Transfer Act as a holder of an absolute claim.”). The receivership entities were thus creditors because they had a right to a return of the funds Nadel transferred for unauthorized purposes for the benefit of their innocent investors. See Lehmann, 56 F.3d at 754. The Receiver’s claim thus fits within the statutory language of FUFTA, which requires the existence of a creditor and a debtor.

Wiand v. Lee, 2014 WL 2446084, at *6.

This holding may open the door for equity receivers to clawback funds for the benefit of the receivership entities and close the door on protracted litigation on whether a receiver has standing to pursue claims for the benefit of the receivership estate under FUFTA. The Eleventh Circuit’s opinion recognizes that while a receiver cannot pursue claims directly on behalf of the victims of a scheme, he can utilize the victims’ contingent claims against the receivership entities to satisfy the standing requirements to bring claims against the recipients of the receivership entities’ funds under FUFTA. Accordingly, the Court’s holdings in Wiand v. Lee are likely to arise in cases that do not involve a traditional Ponzi scheme.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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